Russia raises interest rates by 0.25%

The Russian Central Bank raised all of its key interest rates by a quarter point on Thursday, in a surprise move that is hoped will tame inflation which stands at 6%, in close proximity to the Economy Ministry's annual forecast of 7%.

Last week the bank said inflation had reached 6.3% year-to-year, the upper limit of the central bank's target for year-end inflation; caused by higher food prices due to a poor harvest this year, and a planned rise in utility rates.

In other countries slowing growth is putting pressure on central banks to keep rates low, or cut them – as has been done recently in Brazil, India and China.

Russia’s GDP growth has slowed following a fall in European demand for oil and gas. The Economy Ministry now predicts 3.5% growth for the full year, with second-half growth below 3%.

Despite an economic slowdown, the Russian government is more concerned about rising prices, leading to the central bank’s failure to meet its inflation target of 5-6 percent for 2012.

"The decision was made in view of prices and expected inflation growth, which increases the risks of exceeding the medium-term inflation targets of the Bank of Russia," the bank said after its monthly policy meeting.

Some economists had been saying before the decision that a failure to raise rates could be seen as a concession to business lobbies who benefit from cheaper lending and a weaker rouble. The currency market reacted almost immediately to the rate increase with the dollar depreciating against the rouble within a range of 0.5%.

“For the economic situation it is not a very positive factor, as an increase in interest rates raises the cost of borrowing for businesses”, says Oleg Podymnikov, Head of Investor Operations at Lanta-Bank.